Have you ever been surprised to see your credit score drop after opening a new credit card? You’re not alone. Many people experience a temporary dip in their credit score after applying for a new card, and it can be frustrating to understand why.
This article will explore the reasons why your credit score might drop after opening a new credit card and offer tips on how to minimize the impact. We’ll also address some common concerns and misconceptions about credit scores and credit cards.
Why Opening a New Credit Card Can Affect Your Score
There are a few key reasons why opening a new credit card can cause your credit score to drop:
1. Hard Inquiries: When you apply for a new credit card, the issuer will typically perform a hard inquiry on your credit report. This inquiry can temporarily lower your score by a few points The good news is that hard inquiries only stay on your credit report for two years, and their impact on your score diminishes over time.
2. Credit Utilization: The ratio of the credit you use to the total credit that is available to you is known as your credit utilization. Getting a new credit card extends your available credit limit, but it doesn’t always translate into more credit being used. This can reduce your credit utilization ratio, raising your credit score positively. But if you begin making large purchases on the new card without paying it off in full each month, your credit utilization ratio will rise and your score may suffer.
3. Average Age of Accounts: The average age of your credit accounts is another factor that affects your credit score. When you open a new credit card, it lowers the average age of your accounts, which can temporarily lower your score. However, as the new account ages, its impact on your average age of accounts will decrease.
Tips to Minimize the Impact of Opening a New Credit Card on Your Score
Here are a few things you can do to minimize the impact of opening a new credit card on your credit score:
- Apply for new credit cards sparingly: Only apply for a new credit card if you need it and are confident you can manage the additional credit responsibly.
- Pay your balances in full each month: This will help keep your credit utilization ratio low and avoid interest charges.
- Keep your old credit cards open: Even if you’re not using them, keeping your old credit cards open will help maintain the average age of your accounts.
- Monitor your credit report regularly: Check your credit report for errors and dispute any inaccuracies.
Common Concerns and Misconceptions
Here are some common concerns and misconceptions about credit scores and credit cards:
- Concern: Opening a new credit card will hurt my credit score permanently.
- Misconception: Not necessarily. The impact of opening a new credit card on your score is usually temporary.
- Concern: I should close my old credit cards to improve my credit score.
- Misconception: No. Closing old credit cards can actually hurt your credit score by lowering the average age of your accounts.
- Concern: I should avoid applying for new credit cards altogether.
- Misconception: Not necessarily. Applying for new credit cards can be a good way to build your credit history and improve your score over time, as long as you do it responsibly.
Your credit score may temporarily decline if you open a new credit card, but this effect is typically mild and transient. You can lessen the effect and make sure that your credit score stays stable by heeding the advice above. Recall that using credit cards responsibly is necessary to keep your credit score high and secure your financial future.
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There are general guidelines you can follow to build your credit score. However, often disregarded are the things you do that really lower your score, even if you were acting in a way you believed to be beneficial.
The good news is that many credit score dings are temporary and can be easily recovered. And once you get past the initial fluctuation, doing things like paying off a loan or applying for a new credit card will frequently benefit you in the long run.
Whether you know it or not, the five things listed below by CNBC Select could be the reason behind a sharp decline in your credit score.
You applied for a new credit card
When you apply for a new credit card, card issuers check your credit report because they want to know how much of a risk you are before extending you credit. This credit inquiry, also known as a “hard pull” or “hard inquiry,” temporarily reduces your credit score by a few points. Hard inquiries are recorded on your credit report for two years, but the majority of lenders use FICO, which only takes the last 12 months’ worth of inquiries into account when determining your credit score.
But hard inquiries on your credit report arent necessarily bad when they happen in moderation. After all, applying for credit cards is a great first step in building credit. Credit cards can help raise your credit score if you use them responsibly, charging purchases and making full payments by the due date. If you want to establish credit, you should think about applying for the Capital One Platinum Credit Card, which is intended for applicants with average credit, or the Petal® 2 “Cash Back, No Fees” Visa® Credit Card, which offers cash back. (See rates and fees).
Use the issuer’s preapproval or prequalification offers to see if you qualify for a new card in order to minimize the amount of needless hard pulls on your credit report. These will give you an idea, but they won’t guarantee that you’ll be approved for that particular credit card.
When it comes to submitting applications for new credit products, make sure to space them out over time. Apply for a new credit card no more than once every three months. If your credit score is lower, you may want to wait even longer between applications.
Does Opening a New Credit Card Hurt Your Credit Score?
FAQ
Why did my credit score drop 30 points after opening a credit card?
How many points does your credit score drop when you open a credit card?
Why has my credit score gone down after getting a credit card?
How long does it take for credit score to bounce back after opening a credit card?
Why did my credit score drop after getting a new credit card?
Your credit score dropped after getting a new credit card for a few reasons: The credit card company performed a hard inquiry to verify your creditworthiness. Once you were approved, the credit card issuer reported the new account to the three main credit bureaus — Experian, Equifax and TransUnion.
Why does my credit score go down?
This will often trigger a drop in your credit score until you can pay down your credit card debt again. When new negative details, like late payments or collection accounts, show up on your credit report, it’s common for your credit score to decline. Payment history makes up 35% of your FICO® score.
Why did my credit score drop if I paid off a debt?
Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed. However, if you are certain it is for no reason, check to be sure there is not a mistake in your credit reports or that you’re not a victim of identity theft. Why did my credit score drop when I paid off a debt?
How does a new credit card affect your credit score?
The credit card company performed a hard inquiry to verify your creditworthiness. Once you were approved, the credit card issuer reported the new account to the three main credit bureaus — Experian, Equifax and TransUnion. This action further impacted your new credit and length of credit history factors, effectively reducing your credit score.